KUALA LUMPUR (July 12): CGS International maintained its “neutral” rating on the technology sector, following a Penang visit revealing that the tech companies are steadily ramping up production in high growth areas.

In a sector update on Friday, CGS stated that the rating came due to their foresight of diminishing earnings risks on improving the industry outlook. The house also noted imminent signs of a potential semiconductor industry upcycle.

Valuations are relatively demanding, however, with the KLTEC Index currently trading at 33 times 12-month forward price-earnings (P/E), said CGS.

This is despite the house’s strong sector earnings per share (EPS) CY2024F (calendar year 2024 forecast)/2025F growth projection of 25%/18% respectively.

Genetec Technology Bhd (KL:GENETEC) (target price/TP: RM3.60, with RM2.36 close), Mi Technovation Bhd (KL:MI) (TP RM2.90, RM2.67 close), and Uchi Technologies Bhd (KL:UCHITEC) (TP RM4.71, RM3.97 close), were among CGS’ sector top picks, with Mi Technovation providing attractive growth at reasonable valuations, and Uchi offering a 7%-8% dividend yield.

CGS noted that the new National Semiconductor Strategy (NSS) could provide RM25 billion in fiscal support that will be positive for local semiconductor players, through more incentives and speedier spillover from increased foreign direct investments and the China+1 strategy.

“More encouragingly, this could help general upskilling of the local workforce, especially within the IC (intergrated circuit) design and advanced packaging through sizeable investments from key IDMs, such as Intel, Texas Instruments and Infineon.

“The Malaysian government has also committed to establishing a new IC Design Park in Selangor, having secured key partner companies such as ARM Ltd, Phison Malaysia, SkyeChip and Shenzhen Semiconductor Industry Association,” the house added.

In their key takeaways, the house noted a positive outlook on the general business direction going into 2H2024F (the second half of 2024, forecast) and 2025F, attributed to the sustained broad-based order recovery momentum, forays into new areas for business diversification, as well as growing foreign direct investments (FDIs) into the local electrical and electronics (E&E) sector.

CGS also highlighted Malaysia’s position as a neutral ground between the US and China, benefiting the local tech players catering to the overall market’s needs.

Additionally worth noting was the increased traction into frontend semiconductor space across various local tech companies in IC design process, as well as equipment and sub-component equipment supply.

Meanwhile, sector upside risks included stronger-than-expected broad demand, continued ringgit weakness against the US dollar, and strong China+1 and artificial intelligence (AI) spillover. 

Downside risks in the sector entailed the weakening demand recovery, new projects failing to materialise, and growing US-China semiconductor chip war.